2021 (7) TMI 324 - AT - Income Tax

Existence of an Assessee s PE in India - Double Taxation Avoidance Agreement between India and the UAE - CIT(A) held that activities of the Project Office of the assessee were 'preparatory and auxiliary' in nature in terms of the Article 5(3)(e) of the Double Avoidance Agreement between India and the UAE - HELD THAT - As decided in own case 2016 (2) TMI 47 - DELHI HIGH COURT the consideration of various activities has been specified in the contracts in question. Annexure C (Contract Price Schedule and Rental Rates Schedule) specifically assigns value to various activities. It is also not disputed that the invoices raised by the Assessee specifically mentioned the work done outside India as well as in India. Thus, even though the contracts in question may be turnkey contracts, the value of the work done outside India is ascertainable. There is no dispute that the values ascribed to the activities under the contracts are not at Arm's Length. There is also no material to indicate that the work done outside India included any input from the Assessee's PE in India. The ITAT had considered the contract and in view of the fact that the consideration for various activities such as design and engineering, material procurement, fabrication, transportation, installation and commissioning had been separately specified, the Tribunal rightly held that the consideration for the activities carried on overseas could not be attributed to the Assessee's PE in India In view of the conclusion that the Assessee did not have a PE in India during the AYs 2007-08 and 2008-09, no income of the Assessee from the projects in question can be attributed to the Assessee s PE.- Decided in favour of assessee.

Summary

Issues Involved:
1. Permanent Establishment (PE) status of the Project Office under Article 5(2)(c) of the Double Taxation Avoidance Agreement (DTAA) between India and UAE.
2. Nature of activities of the Project Office as 'preparatory and auxiliary' under Article 5(3)(e) of the DTAA.
3. Existence of Installation PE under Article 5(2)(h) of the DTAA.
4. Status of M/s Arcadia Shipping Ltd (ASL) as a Dependent Agent Permanent Establishment (DAPE) under Article 5(4) of the DTAA.
5. Attribution of income to the assessee's PE in India.
6. Taxability of profit attributable to the assessee’s PE.

Issue-Wise Detailed Analysis:

1. Permanent Establishment (PE) Status of the Project Office:
The Tribunal examined whether the Project Office of the assessee in India constituted a fixed place of business and a PE under Article 5(2)(c) of the DTAA. The High Court had previously ruled that the Project Office, established in Mumbai in 2005, did carry on part of its business through this office, satisfying the conditions under paragraphs 1 and 2(c) of Article 5 of the DTAA. However, the Tribunal had to determine if any exclusionary clauses under paragraph 3 of Article 5 applied.

2. Nature of Activities as 'Preparatory and Auxiliary':
The Tribunal analyzed whether the activities of the Project Office were of a preparatory or auxiliary nature under Article 5(3)(e) of the DTAA. The assessee contended that the Project Office was only used for correspondence and as a communication channel, without participating in the execution of contracts. The Tribunal found no material evidence to contradict this claim, thus accepting that the Project Office’s activities were preparatory or auxiliary. Consequently, the Project Office did not constitute a PE under Article 5(3)(e) of the DTAA.

3. Existence of Installation PE:
The Tribunal considered whether the assessee had an Installation PE under Article 5(2)(h) of the DTAA. The High Court noted that the activities at the project site commenced on 19.11.2006 and continued until 27.04.2007, a period of less than nine months. Since the duration did not meet the nine-month threshold required under Article 5(2)(h), the Tribunal concluded that the assessee did not have an Installation PE.

4. Status of M/s Arcadia Shipping Ltd (ASL) as DAPE:
The Tribunal evaluated whether ASL constituted a DAPE of the assessee under Article 5(4) of the DTAA. The High Court found that ASL provided logistics and consultancy support to various entities and was not exclusively working for the assessee. The consultancy agreement did not authorize ASL to conclude contracts on behalf of the assessee. Therefore, ASL was considered an agent of independent status under Article 5(5) of the DTAA and did not constitute a DAPE.

5. Attribution of Income to the Assessee’s PE:
Given the conclusion that the assessee did not have a PE in India, the Tribunal held that the question of attributing any income to the PE did not arise. The High Court had previously ruled that the method of computation of taxable income adopted by the assessee was not supported by Section 44BB of the Act or the CBDT Instruction No.1767.

6. Taxability of Profit Attributable to the Assessee’s PE:
The Tribunal noted that since the assessee did not have a PE in India, the profits attributable to the offshore segment and onshore service segment were not taxable in India. The High Court had previously ruled that only the income attributable to a PE in India could be taxed, and since the Project Office’s activities were preparatory or auxiliary, no income could be attributed to it.

Conclusion:
The Tribunal, following the binding decision of the Hon’ble High Court of Delhi, found no grounds to interfere with the CIT(A)’s order. The appeal filed by the revenue was dismissed, and the decision was announced in the open court on 01.07.2021.